Shares of generic pharmaceutical manufacturers Dr. Reddy’s Laboratories (RDY), based in India, and Teva Pharmaceuticals (TEVA), based in Israel, moved in the opposite directions Thursday after reporting quarterly results.

AP/The Roanoke Times

In U.S. trading, Dr. Reddy’s rose more than 3%, while Teva fell 3.4%. Here’s why:

Dr. Reddy’s reported that profit for the fiscal second quarter ended in September rose 26%, beating analyst estimates. It marked the first time that consolidated net profit exceeded 700 crore rupees; it came in at 722 crore ($110.3 million). (One crore in rupees equals 10 million rupees. One dollar is worth 65.45 rupees.) Per share results were in line with the mean estimate among analysts. Sales were strong in North America, which accounts for half of sales, and in Europe and India, each of which account for about 12% of sales. Dr. Reddy’s is focused on improving quality controls and infrastructure to meet pending global good-manufacturing practices, according to CEO G.V. Prasad via McClatchy Tribune Information Services.

Teva profit declined to $103 million, or 12 cents per share, for the third quarter ended in September, largely due to restructuring charges. That was down from $876 million or $1.02 per share in the year-ago period. On an adjusted basis, earning were $1.35, beating analysts’ expection of $1.28, according to Dow Jones Newswires. Teva also raised its guidance for the year. Teva is scheduled to close its roughly $40 billion purchase of the generics business of Allergan (AGN) in the first quarter of 2016.

Emerging markets are proving a drag for some U.S. companies, and a potential boon for others. Here’s today’s evidence from U.S. oilfield services giant Schlumberger (SLB), spice producer McCormick (MKC) and Israel’s Teva Pharmaceutical Industries (TVA).

Associated Press

A Schlumberger hydraulic fracturing operation in Wyoming.

Shares of Schlumberger are down 2% today after Russia’s Eurasia Drilling confirmed it will not sell a minority stake to the U.S. energy company. Reuters reports Schlumberger wanted to buy a more than 45-percent stake in Eurasia for about $1.7 billion, “potentially paving the way for it to become the sole owner of Russia’s most-active oilfield services company.”

Teva, whose shares are up more than 3%, said today it agreed to acquire Mexican drug maker Representaciones & Investigaciones Medicas for $2.3 billion, MarketWatch reports. According to Nomura research by Shibani Malhotra and Austin Nelson, most of Rimsa’s products are branded and 60% of sales are higher-margin transactions not reimbursed by the government. They think the Mexico deal can deliver a double-digit return on invested capital, long term; that is “more important” in Nomura’s estimation than “accretion” – the incremental addition to earnings.

McCormick stock is down 4% today. The company earned 85 cents per share in the latest quarter, on an adjusted basis, which was 2 cents short of analyst expectations. Revenue was higher than forecast. McCormick profits have been hurt by the strong dollar; it predicted a resulting 5 percentage point decline in fiscal 2015 sales growth as a consequence. The weak Mexican peso and sagging profits in India contributed to the drag on sales, the Wall Street Journal reports. See “McCormick Earnings Fall in Latest Quarter.” (Subscription required.)

Pharmaceutical stocks’ performance in India outpaced the country’s broader market in May, and have outpaced competitors in the U.S. and Europe so far this year.

In a fresh Citi report chock full of stats, Indian pharma stocks’ performance in May came in third, up 3%, behind competitors in Korea and China. So far this year, Korean and Chinese pharma are the outperformers,up 105% and 47% using recent data, followed by names in the U.S. (up 24%) and India (up 20%).

Citi has a Buy rating on 9 Indian pharma names. Among them, three are expected to show a decline in earnings this year, in local currency: Biocon, Fortis Healthcare and Wockhardt.

There’s one way for U.S. investors to play India’s pharma industry with a U.S.-traded stock: Dr. Reddy’s Laboratories (RDY), which is up 6.9% so far this year, compared to a 2.3% decline in the iShares MSCI India ETF (INDA). Dr. Reddy’s and locally-traded Indian player Aurobindo Pharmaceutical (524804.India) are among Citi’s top pharma and biotech names globally on a list that includes Eli Lilly (LLY), Bristol-Myers Squibb (BMY), Novartis (NVS), Shire (SHPG), Astra Zeneca (AZN), Teva Pharmaceutical Industries (TEVA), Japan’s Shionogi (SGIOF) and AstellasPharma (ALPMY), Glenmark Pharmaceuticals (532296.India), Luye Pharma (2186.HongKong) and Seegene (096530.Korea).

Among the Indian pharma names on which Citi has Buy ratings, we’ve included Citi’s target price below, in rupees, followed by the potential upside to the most recent price. These names are expensive, with a weighted average price-to-earnings multiple of nearly 32 times relative to compound annual core earnings growth of about 24% over the next three years. Apollo and Wockhardt are the most expensive, though the latter is expected to produce compound annual earnings growth of 58%. See table below.

Sihuan, which trades over the counter in the U.S., is down more than 6% this morning. WuXi, which also trades over the counter, is down fractionally. Dr. Reddy’s shares are up 0.3%.

Here’s Morgan Stanley on the outlook for China’s pharmaceutical companies:

“Sector rotation in the last month of 2014 cast a shadow on China healthcare stocks, but we believe performance will get back on track in 2015, given healthy fundamentals and more appealing valuations. After the correction last December, the offshore China healthcare sector P/E dropped below its historical average. A turning point could come in March, when we expect most companies will report solid 2014 results and predict a healthy 2015 outlook. We expect faster industry growth in 2015 than in 2014, with more deals especially from large companies.”

On India’s pharma company outlook:

“The U.S. market outlook could dominate 2015 [with generic drug pricing at a crossroads.] We cite the sizable base for Indian companies, greater competitive intensity, flattish new opportunities (~$20 billion patent expirations), and pricing pressure (from customer consolidation). To balance, cost competitiveness, scale in operations and firepower in the pipeline remain – roughly 758 ANDAs [abbreviated new drug applications] are pending approval (1,211 ANDAs approved), and the industry is aiming at complex drugs, which should help sustain growth in 2015. gNexium and gCopaxone could be the prominent launches in 2015.”

Since the U.S. is a factor in the global market, here’s what Morgan Stanley highlighted, with our edits:

U.S. biotech: Pricing always a risk … M&A by large caps could become a more visible component of capital allocation in 2015.

Major pharma: foreign exchange poses a modest risk to 2015 financials as the U.S. dollar strengthens, but earnings should be in line with expectations. Success in major new therapeutic categories (CETPi for cholesterol, Alzheimer’s and cancer) would help boost premium valuation.

Specialty pharma: It rose 31% in 2014 vs major pharma’s 14% rise … the global pharma market remains highly fragmented, despite the torrid pace of M&A in recent years. … “deal activity will continue in this fragmented market and drive further outperformance in 2015.”

For investors seeking global healthcare exposure, the iShares Global Healthcare ETF (IXJ) and the SPDR S&P International Health Care Sector ETF (IRY) are dominated by the largest international pharma names.

Pharmaceutical sales growth in emerging markets could top the 7% to 8% annualized figure of recent years, but lower margins compared to the developed world are likely to continue to be a profit constraint.

Gilead Sciences

In a fresh note on the 2015 outlook for global pharmaceutical sales, Morgan Stanley writes that China’s piece of the spending pie is likely to double, from 8 percent of $965 billion in 2012, to 15% of roughly $1.2 trillion in 2017. Emerging markets are likely to account for roughly two thirds of the pharma industry’s global growth through 2017, split between China and the rest of the emerging world. Notably, Europe’s share of spending and growth is expected to shrink. Morgan Stanley writes:

“EM sales growth has been highly volatile on a quarterly basis, but appears stable at ~7-8% on an annual basis over the past few years. We expect quarterly volatility to continue, but growth could pick up slightly in 2015 from increasing healthcare spending as well as easing of headwinds including government price pressure and major product patent expirations.”

However, low margins obviously mute the benefits of strong sales in developing economies. Emerging market pharma operating margins, which exclude corporate and research/development expenses, were 31% in 2013, well below the industry average of 55%, and operating margins of 69% in the U.S., according to Morgan Stanley. Morgan Stanley notes that “GlaxoSmithKline (GSK) has disclosed lower EM margins: likely not unique among global pharma.”

While there is a widespread belief that an increase in U.S. interest rates will bring emerging market stocks to their knees, that conclusion is not borne out by history.

So writes Markus Rosgen at Citi, who adds that a selloff is less likely given low equity valuations: The MSCI Emerging Markets Index (and the iSharesMSCI Emerging Markets ETF (EEM)) trade with a price-to-earnings multiple of about 14 times. Rosgen is bullish on emerging markets.

Citi adds:

“In contrast to fears over rising rates in the U.S., Citi economists expect €1 trillion of quantative easing from the European Central Bank in the fourth quarter of 2014 or first quarter of 2015 … ECB stimulus can extend the search for yield in Europe, but looks for investments such as (eg. Rio Tinto (RIO), Allianz (AZSEY) & AXA (AXAHY) …)

Yesterday, Indian pharmaceutical company Dr. Reddy Laboratories (RDY) plunged 2.6% after reporting weaker than expected earnings. Today, investors still hate the company–its stock has dropped another 2.7% to $33.88, bringing the two day decline to 5.26%.

Associated Press

The Indian company reported net income of $69 million, or 40 cents per share, in the three months that ended Dec. 31. That compares to $94 million, or 50 cents per share, in the prior year’s quarter. Revenue rose 3 percent to $522 million. The currency figures are based on a conversion rate of one U.S. dollar equaling 54.86 Indian rupees.

Analysts surveyed by FactSet expected, on average, earnings of 49 cents per share on $540.7 million in revenue.

Into the selling step Nomura’s Saion Mukherjee and Aditya Khemka. They argue that Dr. Reddy is still worth owning, despite the earnings miss. U.S. sales should pick up in the company’s fourth quarter, the analysts say, and could get even better in the following months if Reddy gets approval for some new “low competition products.” Emerging market sales in India and emerging markets were steady, while Russia appears safer thanks to more over-the-counter sales.

The stock also looks cheaper at a price/earnings ratio of 16.6 times 2014 earnings–a 10-15% discount to other drug makers, the analysts say.

The upshot: “We believe sustained growth in EMs and visibility on complex generics pipeline over time could lead to a re-rating,” Mukherjee and Khemka say.

Reddy has dropped 0.5% during the past month and has gained 7.1% during the past year, according to Morningstar.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.